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Sole trader vs limited company (UK, 2025/26)
If you searched for a limited company vs sole trader calculator, this page is for you. A single calculator cannot honestly model both sides — the two structures use different tax bases, different National Insurance rules, and different ways of pulling money out. This page compares them on the dimensions that actually matter for a UK side hustle or small business in the 2025/26 tax year, and points you to the parts of the site that can give you firm numbers.
Scope: our calculator covers sole trader / self-employed Income Tax and Class 4 NI only. It does not model Corporation Tax, salary + dividends, or director's NI.
This is a general comparison, not personal tax advice. For a structural change such as incorporating an existing sole trade, speak to a chartered accountant about Corporation Tax, VAT, IR35, incorporation reliefs and the cash-flow impact in your specific situation.
The short answer
For most UK side hustles earning up to around £30,000–£40,000 of profit a year, sole trader is simpler, cheaper to run, and the tax bill is similar or lower once you account for accountant fees and double layers of tax on a limited company. Limited company becomes more attractive when profit is consistently well above the higher-rate threshold, when you want to leave profits in the business, when you need limited liability for genuine contractual risk, or when clients require it. The cut-off is rarely a single number — it depends on how much you draw out, your other income, and your appetite for paperwork.
Sole trader vs limited company at a glance
All figures are for the 2025/26 UK tax year (England, Wales and Northern Ireland). Scottish Income Tax bands differ for sole traders — see the Scottish self-employed calculator.
Dimension
Sole trader
Limited company
Income tax base
You pay Income Tax personally on business profit (income minus allowable expenses) through Self Assessment. Rates: 20% / 40% / 45%, with the £12,570 Personal Allowance.
The company pays Corporation Tax on profit: 19% on profits up to £50,000, 25% above £250,000, with marginal relief in between (effective 26.5% on the middle slice). You then pay personal Income Tax on what you take out as salary or dividends.
National Insurance
Class 4 NI on profit: 6% between £12,570 and £50,270, 2% above. Class 2 NI is treated as paid above the £6,725 Small Profits Threshold (no cash payment) but still counts for State Pension.
No self-employed NI. The director pays Class 1 employee NI on any salary, and the company pays employer's NI (15% from April 2025 above the £5,000 secondary threshold). Dividends are not subject to NI.
How you take money out
All profit is yours as it is earned. Drawings are not a tax event — the tax is on profit, not on what you withdraw.
Salary (PAYE), dividends (8.75% / 33.75% / 39.35% above the £500 dividend allowance), or leave profit in the company. Dividends can only be paid from post-Corporation-Tax profits.
Legal liability
You and the business are the same legal person. Business debts and contractual claims can reach personal assets.
The company is a separate legal entity. Personal assets are generally protected, though directors can be personally liable for unlawful dividends, personal guarantees, or wrongful trading.
Admin and filing
Self Assessment tax return once a year (deadline 31 January after the tax year). Optional simplified expenses. No public filings.
Annual accounts and Confirmation Statement at Companies House (publicly viewable), a Corporation Tax return (CT600), PAYE for any salary, and personal Self Assessment. Most directors use an accountant; budget roughly £800–£1,800 a year.
Set-up cost and effort
Register for Self Assessment with HMRC. Free, takes minutes online. You can trade under your own name immediately.
Incorporate at Companies House (£50 online), set up a business bank account, register for Corporation Tax, PAYE if you'll pay yourself a salary, and possibly VAT.
Pension and tax planning flexibility
Personal pension contributions get tax relief at your marginal rate. Limited scope for income shaping — profit is profit.
Employer pension contributions are a deductible expense for the company, do not attract NI, and are not capped by your salary. You can choose when to declare dividends and leave profit in the company for later.
VAT
Register for VAT if taxable turnover passes £90,000 in any rolling 12 months — same rule, just under your own name.
Same £90,000 threshold, registered in the company name. Voluntary registration can make sense for B2B work where most customers reclaim VAT.
Roughly how the tax compares at different profit levels
These figures are illustrative for a single-person business with no other income, England/Wales/NI bands, 2025/26. They ignore pensions, the £500 dividend allowance interplay with Personal Allowance edge cases, and accountant fees. Treat them as feel-the-difference, not a quote.
£25,000 of profit
Sole trader: Income Tax + Class 4 NI of roughly £3,235 (about 13% of profit). Limited company taking a small salary plus dividends: Corporation Tax + Income Tax on dividends of roughly £3,300–£3,700, before accountant fees of about £1,000+. Sole trader is usually cheaper and simpler at this level.
£55,000 of profit
Sole trader: Income Tax + Class 4 NI of roughly £11,800 (about 21% of profit). Limited company drawing it all out as salary + dividends: typically £11,000–£12,500 of combined tax. The headline numbers are close. Limited company starts to make sense if you want to retain some profit in the company, fund a pension efficiently, or want limited liability.
£100,000 of profit
Sole trader: Income Tax + Class 4 NI of roughly £28,500 (about 28.5%), and you start losing Personal Allowance above £100,000. Limited company can be a few thousand pounds better off if you keep some profit inside, draw down dividends strategically, and pay pension contributions through the company — but only if you actually do that work. If you take it all out as income each year, the gap closes.
For an exact figure on the sole trader side, use our sole trader tax calculator. For the limited-company side, we deliberately do not provide a calculator — the right answer depends on salary level, director's NI, employer's allowance eligibility, dividend timing, pension contributions and retained profit, which a generic tool will get wrong. Use a specialist contractor calculator or talk to an accountant.
When does it actually make sense to incorporate?
Common reasons people switch from sole trader to limited company in the UK:
Profit is consistently above the higher-rate threshold (£50,270) and you don't need to draw it all out each year — retained profit only suffers Corporation Tax.
You want serious pension contributions made by the company as a deductible expense, beyond what your personal income makes possible.
Clients or platforms require it — some agencies, public-sector contracts and B2B clients will not engage a sole trader.
You want limited liability for genuine contractual or product-risk exposure (not for routine freelance work, where indemnity insurance is usually a better answer).
You're planning to take on co-founders, investors, or share-based incentives — only a company structure supports shares.
Reasons people stay sole trader even when the headline tax could be slightly lower as a limited company:
The admin tax (accountant fees, Companies House filings, payroll for one director, separate bank account) eats most or all of the saving.
You actually need every penny of profit personally, so retaining cash in the company isn't useful.
Your work is genuinely low-risk and personally branded (consulting, tutoring, writing, design).
You don't want your accounts visible at Companies House.
Calculate your sole trader tax
If you've decided sole trader is the right structure for you — or you want to see your numbers as a sole trader before deciding — use the calculators on this site. They model Self Assessment Income Tax, Class 2 NI and Class 4 NI on sole trader profit, optionally combined with PAYE salary. They do not model limited-company Corporation Tax, salary + dividends, or director's NI.
Is there a limited company vs sole trader calculator on this site?
No, and we deliberately do not build one. A meaningful comparison needs assumptions about salary level, director's NI, employer's allowance eligibility, dividend timing, retained profit and pension contributions. A generic web calculator either hides those assumptions or makes them for you, both of which produce a number that looks precise but is not trustworthy. Our calculator covers the sole-trader / self-employed side accurately; for the limited-company side, use a specialist contractor accountant's tool or a paid consultation.
At what profit level should I switch from sole trader to limited company?
There is no universal number, but a common rule of thumb is that limited company starts to look worthwhile somewhere between £40,000 and £60,000 of annual profit, and only if you are willing to leave some profit in the company, use pension contributions, or value the limited liability. If you draw every penny out each year and want zero extra paperwork, the crossover is much higher in practice once accountant fees are included.
Do limited company directors pay Class 4 National Insurance?
No. Class 2 and Class 4 NI are for self-employed people. As a limited company director you are an officeholder and (usually) employee of your company. You pay Class 1 employee NI on any salary above the Primary Threshold, and the company pays employer's NI on salary above the Secondary Threshold. Dividends are not subject to National Insurance at all.
How are dividends taxed in 2025/26?
The dividend allowance is £500. Above that, dividends are taxed at 8.75% in the basic rate band, 33.75% in the higher rate band, and 39.35% in the additional rate band. Dividends sit on top of other income for band purposes but use their own rates. They are paid out of post-Corporation-Tax profit, so the headline rates understate the real tax cost.
What is Corporation Tax in 2025/26?
For the 2025/26 financial year, the main rate is 25% on profits above £250,000, the small profits rate is 19% on profits up to £50,000, and Marginal Relief tapers the rate between those points (the effective rate on the £50,000 to £250,000 slice is 26.5%). Thresholds are divided by the number of associated companies.
Can I move from sole trader to limited company later?
Yes, this is common and well-trodden. You incorporate a company, transfer business assets (often using incorporation relief to defer Capital Gains Tax on goodwill or chargeable assets), notify HMRC, deal with VAT registration if relevant, and re-paper client contracts. Get an accountant to handle the mechanics — mistakes around goodwill valuation, VAT and PAYE setup are expensive to unwind.
Does running a limited company affect my mortgage application?
It can. Some lenders treat company directors as self-employed for affordability purposes and look at salary plus dividends, or at retained profit, or at the company's net profit — criteria vary. Sole traders are also assessed on net profit. In both cases lenders typically want two to three years of accounts. The structure choice should be made for tax and liability reasons, not mortgage-shopping reasons, but it is worth being aware of.
What about partnerships and LLPs?
Out of scope for this page. A general partnership taxes each partner like a sole trader on their share of profits. An LLP is a separate legal entity but partners are taxed broadly like the self-employed. Limited companies are the only structure where Corporation Tax and dividend-based extraction apply.
This guide is general information about UK taxation for the 2025/26 tax year. It is not personal tax or legal advice. Rules change — check GOV.UK and consult a qualified accountant before acting.